Vancouver prices heading for a record high

by
Jamie Henry |
05 Nov 2014

It’s been named as Canada’s least affordable city and figures from the CMHC don’t give any comfort to those struggling to buy a home in the city. The average price for detached houses, condos and townhouses is set to reach $811,000 in Greater Vancouver; that’s a 5.6 per cent year-over-year increase. There’s no slowdown forecast over the next two years either with CMHC expecting a 1.2 per cent increase next year and 1.7 per cent in 2016. MLS sales will end the year up 13.2 per cent this year but there will be a reduction in supply over the following two years according to the agency’s analysis. The overall trend for housing starts will continue steady with a dip in 2015 before rising again the year after. Read the full story.

These are stories Report on Business is following Wednesday, Nov. 5, 2014.

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Bank of Canada official seeks changeThe Canadian government is now too “exposed” to the country’s hot housing market, warns a top central bank official who’s calling for more private-sector involvement.

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BUSINESS BRIEFING Bank of Canada raises red flags over Toronto, Vancouver, Calgary housing marketsBUSINESS BRIEFING Home sales, prices rise sharply in Calgary, Canada's hottest marketBUSINESS BRIEFING From west to east, a look at projected house price gains across Canada FILE - This June 19, 2014, file photo, shows a home for sale in Wilmington, N.C. Real estate data provider CoreLogic reports on U.S. home prices in July. In June, prices rose by the smallest year-over-year amount in 20 months, slowed by modest sales and more properties coming on the market. The slowing increases should make homes more affordable after prices had risen sharply last year. At the same time, Americans' pay hasn't risen nearly as fast. (AP Photo/Wilmington Star-News, Ken Blevins, File)REAL ESTATEVideo: Canada's housing bubble about to burst, author says Canada’s mortgage rules don’t need any dramatic changes for now, said Finance Minister Joe Oliver in a press conference after a meeting with private sector economists in Toronto Tuesday. Plus, he says there are tax breaks in store for working families, possibly in the upcoming fall economic update. Greg Bonnell reports.HOUSINGVideo: Don’t expect dramatic changes in mortgage rules: Oliver A new report says downtown dwellers who opt for city life over suburbia are driving the Canadian real estate market. The move downtown is foreseen to grow as more Canadians stay or move back to urban areas. Greg Bonnell has the numbers.VIDEOVideo: Canadians ditch white picket fences for the city lifeLawrence Schembri isn’t the first official to warn how dangerous this could be.

But his paper, published today, is notable in that it comes from a deputy governor of the Bank of Canada, which only recently again cited the threats from the massive debt loads of Canadian households.

Mr. Schembri stresses that the system is sound, as long as there’s no “severe” shock that would drive up unemployment, and that the “imbalances” among consumers will probably ease as mortgage rates inevitably rise.

Nonetheless, he writes in the National Institute Economic Review, things have to change given, among other things, debt-to-income levels that have been at or near record levels in Canada.

“These post-crisis imbalances have accelerated a trend in which the government has become more exposed to the Canadian housing market via its guarantees on mortgage insurance mortgage securitization,” Mr. Schembri writes in the journal published by Britain’s National Institute of Economic and Social Research.

“This trend is not sustainable,” he adds.

“The housing finance framework needs to be adjusted and strengthened by rebalancing the risk exposures among the participants in this market.”

Canada Mortgage and Housing Corp., the government insurer, is, of course, a key player here, while the mortgage market is dominated by the big banks.

The government has taken several steps to cool the market over the past several years.

“However, more work is needed to determine the appropriate adjustments in the pricing of, and quantitative restrictions on, mortgage insurance and securitization to create the right incentives, leverage market forces and achieve a sustainable rebalancing in risk exposures,” Mr. Schembri says.

“In particular, measures should be considered to develop a liquid private-label securitization market in Canada.”

Under the former governor, Mark Carney, the Bank of Canada warned frequently of the dangers to consumers, even threatening a rate hike should households not take steps.

The current governor, Stephen Poloz, has dropped that, though the central bank’s latest monetary policy report again highlighted the risks.

Indeed, the Bank of Canada had, until recently, said the country’s housing market appeared headed for a soft landing.

But in its latest missive, it said the eastern Canadian market was looking that way, while Ontario, Alberta and British Columbia were still running strong.

For the record, the central bank wasn’t saying those markets were in danger of crashing, but observers took it as a warning where Toronto, Calgary and Vancouver were concerned.

And Mr. Schembri returns to this theme today.

“Much of this strength in house-price growth is coming from the greater Vancouver and Toronto areas – which are popular destinations for immigrants and also, based on anecdotal evidence, for foreign investors – and from Calgary, which is benefiting from strong income growth due to high energy prices and elevated levels of economic activity,” he writes.

Sales in the Toronto area climbed 7.7 per cent in October from a year earlier, to 8,552, while the average price surged 8.9 per cent to $587,505, according to the Toronto Real Estate Board today.

New listings, on the other hand, rose by 3.4 per cent.

The outlook?

“While sales growth has tracked strongly so far this fall, many would-be home buyers have continued to have difficulties finding a home due to the constrained supply of listings in some parts of the Greater Toronto Area, particularly where low-rise home types are concerned,” said Jason Mercer, the board’s director of market analysis.

“The resulting sellers’ market conditions are forecast to drive strong price growth through the remainder of 2014 and indeed into 2015 as well.”

Canadian auto parts giant Magna International Inc., meanwhile, reported a solid increase in third-quarter profit and revenue as demand in North America surged.

Profit climbed to $470-million, or $2.19 a share, diluted, from $319-million or $1.39 a year earlier. Sales rose to $8.8-billion from $8.3-billion.

And if you happen to be waiting for your car to be serviced today, ponder this over a cup of coffee: Tim Hortons Inc. beat analyst expectations as same-store sales, the key retailing measure, rose in both Canada and the U.S.

Its profit slipped to $98.1-million or 74 cents from $113.9-million or 75 cents, primarily on the costs associated with its deal to be swallowed by Burger King Worldwide Inc.

Janeon
2014-11-05 12:08:01 PM

If You Buy Toronto Real Estate Now, You’ll Hate Yourself Later

By Robert Baillieul - October 15, 2014 | See also: TOLCAR.UNHR.UN

The most common question I get from family and friends concerns real estate: “Toronto housing prices are soaring; is there still time to invest?”

You can’t predict the next turn in the market. No one has any special insight into future trends. That said, we can say that buying Toronto real estate at current prices makes no business sense.

Let me explain…

Last week, real estate bulls got some bad news from one of the world’s largest home builders. On Friday, Toll Brothers Inc (NYSE: TOL) CEO Douglas Yearley admitted that he had “snooped around” the Toronto market. By his estimate, 60% to 70% of condo buyers had no plans to live in their homes.

“We saw a lot of people buying with no intention of living there – they just planned to flip,” Mr. Yearley told reporters. “When you have a lot of flippers, that’s when a bubble comes.”

Yearley isn’t the only one seeing crazy numbers. The city’s real estate boom has produced some jaw dropping figures. For instance…

$951,000: Toronto is about to become the second Canadian city where a single-family home costs more than $1 million. Last month, the average detached house sold for $951,000, up 8% year-over-year.130 skyscrapers: Toronto has more skyscrapers under construction than any other city in North America. Today, there are 130 high-rise projects underway.39,000 realtors: The number of realtors in Toronto has doubled over the past 10 years. Today, there’s one realtor for every 140 people in the city.37x rental income: Toronto housing prices are valued at 37x annual rental income. Typically, the market has traded between 15x and 20x rental income.3.7% cap rate: Toronto capitalization rates — the rate of return based on what a property is expected to earn in rental income — have hit new lows. This was highlighted last year when the Bayview Village shopping mall sold for a record low cap rate around 3.7%.You have to ask yourself if a 3.7% return is enough to justify the risks of owning real estate. Of course, housing can still be a good purchase if prices keep climbing. There’s lots of money to be made if others are willing to pay ever higher multiples.

But I don’t play that game. You should buy assets that make sense based on cautious assumptions. Nobody should be speculating that people will pay growing premiums for a house.

Am I some sort of anti-housing zealot? No. Real estate is an great way to build wealth – but only at the right price. Thankfully, there are other areas of the market that are more modestly valued.

Take H&R Real Estate Investment Trust (TSX: HR.UN), for example. The firm invests mostly in commercial and industrial properties across Canada. Prices in these markets are far more affordable. Or consider Canadian Apartment Properties REIT (TSX: CAR.UN). This trust owns apartment buildings throughout North America. Housing prices are downright cheap throughout the rest of the country, at least compared to a hot market like Toronto.

The bottom line is that nobody has any insight into the housing market’s next move. But based on today’s prices, buying Toronto real estate doesn’t make any sense from a business point of view. There are better options elsewhere.

Janeon
2014-11-05 12:08:10 PM

If You Buy Toronto Real Estate Now, You’ll Hate Yourself Later

By Robert Baillieul - October 15, 2014 | See also: TOLCAR.UNHR.UN

The most common question I get from family and friends concerns real estate: “Toronto housing prices are soaring; is there still time to invest?”

You can’t predict the next turn in the market. No one has any special insight into future trends. That said, we can say that buying Toronto real estate at current prices makes no business sense.

Let me explain…

Last week, real estate bulls got some bad news from one of the world’s largest home builders. On Friday, Toll Brothers Inc (NYSE: TOL) CEO Douglas Yearley admitted that he had “snooped around” the Toronto market. By his estimate, 60% to 70% of condo buyers had no plans to live in their homes.

“We saw a lot of people buying with no intention of living there – they just planned to flip,” Mr. Yearley told reporters. “When you have a lot of flippers, that’s when a bubble comes.”

Yearley isn’t the only one seeing crazy numbers. The city’s real estate boom has produced some jaw dropping figures. For instance…

$951,000: Toronto is about to become the second Canadian city where a single-family home costs more than $1 million. Last month, the average detached house sold for $951,000, up 8% year-over-year.130 skyscrapers: Toronto has more skyscrapers under construction than any other city in North America. Today, there are 130 high-rise projects underway.39,000 realtors: The number of realtors in Toronto has doubled over the past 10 years. Today, there’s one realtor for every 140 people in the city.37x rental income: Toronto housing prices are valued at 37x annual rental income. Typically, the market has traded between 15x and 20x rental income.3.7% cap rate: Toronto capitalization rates — the rate of return based on what a property is expected to earn in rental income — have hit new lows. This was highlighted last year when the Bayview Village shopping mall sold for a record low cap rate around 3.7%.You have to ask yourself if a 3.7% return is enough to justify the risks of owning real estate. Of course, housing can still be a good purchase if prices keep climbing. There’s lots of money to be made if others are willing to pay ever higher multiples.

But I don’t play that game. You should buy assets that make sense based on cautious assumptions. Nobody should be speculating that people will pay growing premiums for a house.

Am I some sort of anti-housing zealot? No. Real estate is an great way to build wealth – but only at the right price. Thankfully, there are other areas of the market that are more modestly valued.

Take H&R Real Estate Investment Trust (TSX: HR.UN), for example. The firm invests mostly in commercial and industrial properties across Canada. Prices in these markets are far more affordable. Or consider Canadian Apartment Properties REIT (TSX: CAR.UN). This trust owns apartment buildings throughout North America. Housing prices are downright cheap throughout the rest of the country, at least compared to a hot market like Toronto.

The bottom line is that nobody has any insight into the housing market’s next move. But based on today’s prices, buying Toronto real estate doesn’t make any sense from a business point of view. There are better options elsewhere.